Xbox 360 initial production costs may be steep

iSuppli estimates the total cost to manufacture and test a premium Xbox 360, which debuted on Tuesday, was $552.27, compared with its retail price of $399.

Console makers have historically subsidized manufacturing costs by creating and selling their own video games and by collecting fees from publishers who make titles for their systems. Several new Xbox 360 games are priced as high as $60

The Xbox 360's main memory from Samsung Electronics added another $65, while an SIS Southbridge chip cost about $12, iSuppli said. Other costs included a DVD drive, accessories, literature, packaging, assembly and testing.

The price of the system's two main chips should drop during the next year as manufacturing efficiency improves. That should save at least $50 per unit, in addition to other cost reductions.

Many analysts had predicted that the Xbox 360 would initially sell at a loss. "We expected the cost of the console to at least exceed the retail price," iSuppli said.

Microsoft, currently in second place to Sony in the $10 billion U.S. video game market, is gunning for the top spot with the release of its new console. The release of those machines is expected to reignite hardware sales growth. iSuppli is forecasting 38.5 million video game consoles sold next year, up from 28.5 million in 2005.

Microsoft aims to sell about 5.5 million premium and lower-priced basic Xbox 360 units by the end of June. The machine will compete with the PlayStation 3 from Sony and Nintendo's Revolution, each due out in 2006.